Alliance Resource Partners, L.P.

Greetings. Welcome to Alliance Resource Partners LP second quarter 2023 earnings conference call. At this time, all participants are in a listen-only mode. A question and answer session will follow the formal presentation. If anyone should require operator assistance during the conference, please press star zero on your telephone keypad. Please note this conference is being recorded. I will now turn the conference over to Carrie Marshall, Senior Vice President and Chief Financial Officer. Thank you. You may begin.

Thank you, Operator, and welcome, everyone. Earlier this morning, Alliance Resource Partners released its second quarter 2023 financial and operating results, and we will now discuss those results as well as our perspective on current market conditions and outlook for 2023. Following our prepared remarks, we will open the call to answer your questions. Before beginning, A reminder that some of our remarks today may include forward-looking statements subject to a variety of risks, uncertainties, and assumptions contained in our filings from time to time with the Securities and Exchange Commission and are also reflected in this morning's press release. While these forward-looking statements are based on information currently available to us, if one or more of these risks or uncertainties materialize or if our underlying assumptions prove incorrect, actual results may vary materially from those we projected or expected. And in providing these remarks, the partnership has no obligation to publicly update or revise any forward-looking statement, whether as a result of new information, future events, or otherwise, unless required by law to do so. Finally, we will also be discussing certain non-GAAP financial measures. Definitions and reconciliations of the differences between these non-GAAP financial measures and the most directly comparable GAAP financial measures are contained at the end of ARLP's press release, which has been posted on our website and furnished to the SEC on Form 8K. With the required preliminaries out of the way, I will begin with a review of our results for the second quarter, then turn the call over to Joe Kraft, our Chairman, President, and Chief Executive Officer, for his comments. Our strong performance in the 2023 quarter included consolidated revenues of $641.8 million, which were up 3.5% versus the prior year period. The year-over-year improvement was driven primarily by higher coal sales price per ton, which was up 5.7% versus the 2022 quarter and continues to reflect the positive impacts of our contracted order book. On a sequential basis, Total coal sales price per ton was down 7.9% or $5.41 per ton. This was primarily due to approximately 500,000 higher-priced 2022 carryover tons shipped in the sequential quarter at our Tunnel Ridge mine in Appalachia. In our royalty segment, total royalties were $50 million, down 8.3% year-over-year and down 2.1% sequentially, as lower realized oil and gas commodity pricing was partially offset by increases in coal royalty revenue per ton. Specifically, oil and gas royalties average realized sales prices declined 40.2% per BOE versus the 2022 quarter, as NYMAX WTI benchmark pricing peaked during June 2022. Sequentially, oil and gas royalties average sales prices were 4.7% lower per BOE. Coal royalty revenue per ton increased 17.4% versus the 2022 quarter and 5.5% sequentially. As it relates to volume, coal production increased 5.8% to 9.4 million tons compared to the 2022 quarter, while coal sales volumes decreased 0.3% to 8.9 million tons, resulting in a build in coal inventories of 500,000 tons during the 2023 quarter. Compared to the sequential quarter, coal sales volumes increased 5.1% due to higher sales volumes in Appalachia. There were no longwall moves at our Tunnel Ridge mine in Appalachia this quarter, whereas we had two moves in the sequential quarter. Coal royalty tons sold declined 2.8% year over year. Oil and gas royalty volumes were 40.6% higher on a BOE basis due to increased drilling and completion activities on our net acreage and the acquisition of oil and gas mineral interest from Jason Belvedere during the second half of 2022. Turning to costs, segment-adjusted EBITDA expense per ton sold for our coal operations was $37.85, an increase of 7.8% versus the 2022 quarter, primarily due to higher labor-related expenses, higher maintenance costs, as well as the impacts of increased sales-related expenses due to higher sales price realizations. These costs were partially offset by lower materials and supplies expenses during the 2023 quarter. On a sequential basis, costs per ton were 4.6% lower, primarily on the strength of the additional Appalachia volumes from our lower cost tunnel ridge mine. 2023 quarter net income and EBITDA increased 3.8% and 1% respectively over the 2022 quarter, primarily due to higher price realizations in coal which more than offset lower realized prices in oil and gas royalties, along with the inflationary pressures I previously described. Now turning to our balance sheet and cash flow, Alliance had another strong quarter of cash generation, with $153.5 million of free cash flow before growth investments in the 2023 quarter, an increase of 88.7% year-over-year and 9.7% versus the sequential quarter. Our total and net leverage ratios were 0.4 and 0.14 times respectively total debt to trailing 12 months adjusted EBITDA. Total liquidity of 717.2 million remains strong at quarter end, which included approximately 284.9 million of cash on the balance sheet. Our robust cash generating power is affording us many options to attractively deploy capital. During the 2023 quarter, we paid our quarterly distribution of 70 cents per unit, equating to an annualized rate of $2.80 per unit that we expect to maintain throughout the year. This distribution level is unchanged sequentially and up 75% year over year. Additionally, we remain committed to prudently managing the outstanding balance of our senior notes due May 2025. During the 2023 quarter, we repurchased 34.2 million of senior notes and in July 2023, we redeemed another $50 million of senior notes at par. As a result, we ended July with $289.2 million in aggregate principal remaining on the $400 million original issuance. We intend to execute additional purchases and redemptions at par of the senior notes with available cash flows over the next several quarters. As we turn to our updated full-year 2023 guidance detailed in this morning's release, I'd like to spend a few minutes discussing the current state of our markets. As we mentioned earlier in the year, the mild winter and slower start to summer reduced overall demand for both coal and natural gas in the United States during the first half of 2023. Natural gas prices declined sequentially and remained significantly below the year-ago quarter. Lower natural gas prices affected coal burns due to more competitive gas fire dispatch options for our customers. particularly during spring shoulder demand season. Since the end of the 2023 quarter, we've seen a turn in weather patterns with historically high temperatures blanketing much of the U.S. and portions of Europe. A hot summer doesn't necessarily dramatically impact coal burns in the near term, as our customers' units typically run baseload during summer peak demand. But it can highlight the vulnerability of the grid when demand is high and renewable sources are unable to adequately respond. Furthermore, if hot weather persists into the fall, it can change normal burn schedules and accelerate cold consumption, reducing inventories heading into winter. Overall, based upon the strength of our year-to-day results, our contracted committed tons, and a relentless focus on cost control, we remain optimistic 2023 will be another record year for ARLP. As we updated our 2023 full-year guidance ranges, The mild market conditions I just described caused some movement in contract deliveries and shifted the mix between export and domestic markets. We now anticipate ARLP's overall coal sales volumes in 2023 to be in a range of 35.5 to 36 million tons, down from the previous range of 36 to 38 million tons. Illinois basin volumes have been adjusted to reflect lower volumes at our Gibson and Riverview operations. while our Appalachia volume guidance reflects an extended long-wall move at our Metiki mine. Our committed tonnage for full year 2023 is 34.5 million tons at the end of the quarter, or 96% to 97% of our anticipated sales tons. Of that total, 4.8 million tons are currently committed to export markets. The balance of unsold tonnage levels is expected to be supplied in the export markets primarily from our lowest cost operations, thereby still generating attractive margins. Sales pricing for the year is anticipated to be slightly lower than at the time of our last update. We've chosen to modestly adjust the top end of our range for average coal price realizations down by $1 to a new range of $65 to $66 per ton versus $65 to $67 per ton previously. On the cost side, solid execution from our operations team allows us to improve our outlook for segment-adjusted EBITDA expense per ton by $1 to a new range of $38 to $41 per ton. Within Appalachia, we do anticipate higher costs in the back half of the year due to the extended longwall move at Metiki in the third quarter, as well as a normal longwall move scheduled for our Tunnel Ridge mine in the fourth quarter. In our oil and gas royalty segment, we are reiterating our volume guidance ranges for the full year 2023, And we also made a number of adjustments to our outlook, including lower DDNA, a $10 million improvement in SG&A, and a slight reduction in total capital expenditures. With that, I will turn the call over to Joe for comments on the market and his outlook for ARLP. Joe?

Thank you, Kerry, and good morning, everyone. I want to begin my comments by thanking the entire Alliance organization for their continued hard work and dedication. which allowed us to post solid results for the quarter and the first half of 2023. Their efforts helped us deliver year-over-year improvements in coal production, realized coal prices, oil and gas royalty volumes, net income, and EBITDA. Our year-to-date results have been impressive despite coal demand both domestically and globally, being lower than we expected entering this year due to a slower economic growth, mild weather in our targeted markets, and lower natural gas prices. The strong first half performance was led by significantly higher coal sales price per ton, which rose by 21.8%, resulting in total revenues in the 2023 period increasing by 20.4%, to $1.3 billion compared to $1.1 billion for the 2022 period. The year-over-year improvement in realized coal prices reflects the positive impacts of our contracted order book. Segment adjusted EBITDA expense per ton sold for our coal operations for the first half of 2023 was $38.73, an increase of 15%. versus the 2022 period, primarily due to inflationary pressures throughout the year. Our net income and EBITDA rose sharply in the 2023 period, increasing 79% and 29.6% respectively over the 2022 period. These increases reflect higher sales volumes in both coal and oil and gas royalties, as well as higher price realizations in coal, which more than offset lower realized prices in oil and gas royalties, along with the inflationary pressures that Kerry previously described. As Kerry also mentioned, we have adjusted our production targets lower for this year in response to lower domestic demand driven by lower natural gas prices. We are now operating four production units at our Gibson South mine, down one unit from the original guidance in January 2023. At Riverview, we have moved some units from production mode to construction mode to accelerate the timing of the previously announced expansion project at Riverview. In June, we had a groundbreaking event for the new Henderson County mine site, where the new shaft will connect through underground conveyors to eventually be conveyed to the Riverview Prep Plant and Barge Terminal. This project is now scheduled to be completed at the end of 2024. Committed and priced sales tons currently represent 96% to 97% of our updated guidance range, and we plan to sell any remaining uncontracted tonnage primarily into international markets. While our view of export sales volume opportunities has not changed, pricing has been more volatile than previously expected. Accordingly, we have adjusted the top end of our cold sales price per ton sold range downward upon the recent market analysis. On the positive side, we are also lowering our cost estimates by the same amount per ton sold for the year as our team continues to find ways to reduce expenses in a stubbornly volatile inflationary environment. During the 2023 quarter, we agreed to sell an additional 8.6 million tons with multiple customers for coal to be delivered over the 2024 to 2026 time period. As we can see in our updated sales guidance, we committed meaningful tonnage in 2024. We expect contracting activity to continue in the coming months. As of the end of the second quarter, we have committed to sell 25.5 million tons domestically in 2024 and 1.4 million tons to international markets, representing an increase of 3.5 million tons from our last update. We also committed and priced a total of 5.1 million tons for delivery in 2025 and 2026. Our contracting customers continue to value the certainty of supply we provide across all market conditions. The modest guidance revisions this quarter have not changed our view that we still are on track to achieve record financial results this year. As we look beyond 2023, we are encouraged by growth opportunities being pursued by our new ventures group, the recent increase in the forward oil and gas price curves, and acquisition prospects for our oil and gas royalty segment. We are also seeing stability for coal demand over the next several years. Many of our customers are projecting significant growth in electricity demand as record numbers of new manufacturing facilities are being announced to come online over the next several years. All of these announced projects require exceptionally large electrical loads, adding to the reliability concerns of the stakeholders responsible for meeting the rising energy needs of their customers. The increased electricity demand should lead to slowing the premature closing of coal-fired power plants in the eastern United States. We also expect the growth in LNG terminals coming online over the next Five years will support higher domestic natural gas prices, further supporting stable demand expectations for our coal segment over the next 5 to 10 years. In closing, I'm pleased with ARLP's solid first half results and encouraged by the opportunities in front of us. We continue to add to our heavily contracted codebook at attractive levels, and our robust cash flow generation positions us to continue improving our balance sheet and pursue attractive investments to meet the evolving energy needs of tomorrow. Looking forward, we believe ARLP is well positioned to deliver solid growth and attractive cash returns to our unit holders in 2023 and beyond. That concludes our prepared comments, and I will now ask the operator to open the call for questions.